International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $819 billion y-o-y (19.5%), surpassing $5.0 TN for the
first time.

February 26 - Bloomberg (Fabio Alves): "Brazil's foreign reserves may surpass
$100 billion this week as the central bank boosts its purchases of dollars
to stem the real's gains. Brazil's international reserves on Feb. 22 reached
$98.2 billion, a record high for Latin America's biggest economy and nearly
equal to Mexico's and Argentina's reserves combined."

Currency Watch:

March 2 - Bloomberg (Min Zeng and Ye Xie): "The yen rose to the highest level
in almost three months against the dollar, heading for its biggest weekly gain
since December 2005, after a slump in emerging-market stocks and bonds discouraged
investors from borrowing the Japanese currency to buy higher-yielding assets."

The dollar index slipped 0.4% to 83.64, although there was plenty of currency
action away from the greenback. On the upside, the Japanese yen increased 3.7%,
the Swiss franc 1.3%, the Taiwan dollar 0.7%, and the Swedish krona 0.3%. On
the downside, the South African rand declined 4.7%, the Turkish lira 3.7%,
the New Zealand dollar 2.7%, the Brazilian real 2.0%, the Iceland krona 1.5%,
and the Canadian dollar 1.5%.

Commodities Watch

March 1 - Bloomberg (Xiao Yu): "China, the world's biggest consumer of copper,
imported more of the metal in January than in any month since June 2005 and
demand is showing no sign of slackening as the country enters its peak demand
period."

February 26 - Bloomberg (Daniel J. Goldstein): "Cattle prices in Chicago surged
to their highest level since 2003 after a government report signaled U.S. beef
processors may have fewer animals available to slaughter this year. Hog futures
also rose. U.S. feedlots, burdened by higher costs for corn, are taking in
fewer animals to fatten for slaughter."

February 28 - Market News International: "The notional outstanding amount
of over-the-counter (OTC) derivatives transactions by major Japanese institutions
at end-December 2006 was $18.7 trillion, up 9.5% from end-June 2006, the Bank
of Japan said... The outstanding balance of derivatives for exchange-traded
contracts rose 15.5% to $8.5 trillion in the same six month period. Among OTC
contracts, the balance of interest rate related contracts at end-December was
$15.8 trillion, up 8.3% from end-June, while the balance of forex related contracts
was $2.9 trillion, up 16.2%..."

February 28 - Bloomberg (Zhang Dingmin): "China's property prices rose faster
in January...even as the government has been trying to slow increases with
curbs on land supply and bank loans. Prices in 70 major Chinese cities last
month increased 5.6% from a year earlier..."

February 26 - Bloomberg (Samuel Shen): "China's retail sales surged 15% from
a year earlier to 220 billion yuan ($28.2 billion) during the nation's week-long
Lunar New Year holiday, spurred by rising incomes."

February 28 - Bloomberg (Nipa Piboontanasawat): "Hong Kong's economy extended
its longest winning streak since 1997 with a 7 percent expansion in the fourth
quarter, the government said... Hong Kong's growth spurt has lasted three and
a half years, the city's best performance since the Asian financial crisis..."

India Watch:

February 28 - Bloomberg (Cherian Thomas and Kartik Goyal): "India's economy
grew at the slowest pace in more than a year as patchy monsoon rains crimped
farm production, which accounts for a fifth of the nation's economy. Asia's
fourth-largest economy expanded 8.6 percent in the three months ended Dec.
31..."

February 28 - Bloomberg (Bibhudatta Pradhan): "India's Prime Minister Manmohan
Singh said today that reining in prices was 'not an easy task' and that inflation
was a matter of concern. The government would seek to contain inflation, the
prime minister told reporters in New Delhi today, on the eve of the annual
budget presentation. The government's challenge was to curb inflation while
stimulating growth, Singh said. 'We are trying to control inflation without
hurting agricultural and industrial growth,' Singh said. 'It is not easy to
control inflation while stimulating the growth impulses in our economy.'"

February 27 - Bloomberg (Cherian Thomas): "India needs to step up supply of
farm products and manufactured goods to 'tame' inflation stoked by record economic
growth, a finance ministry report said... Inflation in India...is at a two-year
high as consumer demand aided by surging loan growth and higher salaries outstrips
the production of wheat, cement, steel and other products."

February 27 - Bloomberg (Cherian Thomas): "India's government may spend as
much as 60 percent more on ports, power plants and roads in its next budget,
allowing companies to cut costs and help damp the fastest inflation in two
years."

February 28 - Bloomberg (Theresa Tang): "Taiwan's jobless rate held at almost
the lowest in six years in January as domestic demand boosted the economy.
The seasonally-adjusted rate was unchanged from 3.9%..."

March 1 - Bloomberg (Seyoon Kim): "South Korea's exports increased at the
slowest pace in four months in February... Exports climbed 11.3 percent from
a year earlier..."

February 28 - Bloomberg (Stephanie Phang): "Malaysia's economy grew at the
slowest pace in a year in the fourth quarter as exports eased amid weaker demand
for electronics from markets such as the U.S. The $147 billion economy expanded
5.7% from a year earlier..."

March 2 - Bloomberg (Theophilos Argitis): "Canada's economic growth in the
fourth quarter was the slowest in more than three years, as manufacturers sold
their inventories to meet demand and consumer spending eased. Gross domestic
product growth in the world's eighth-largest economy eased to an annualized
1.4% rate between October and December, from a revised 2% pace in the third
quarter..."

February 27 - Bloomberg (Matthew Brockett): "Money-supply growth in the euro
region unexpectedly held at a 17-year high in January, strengthening the case
for the European Central Bank to keep raising interest rates. M3 money supply,
which the ECB uses as a gauge of future inflation, rose 9.8 percent from a
year earlier, the same as in December..."

February 28 - Bloomberg (Christian Wienberg): "Denmark's economic growth unexpectedly
slowed to 2.9% in the fourth quarter as a mounting labor shortage crimped production
at some companies and the trade balance deteriorated. Growth slowed from 3.2%..."

February 28 - Bloomberg (Jonas Bergman): "Growth in Swedish household debt
slowed in January as the central bank raised its benchmark interest rates seven
times in the past thirteen months to damp growth and borrowing in the largest
Nordic economy. Household borrowing growth slowed to an annual 12% from 12.3%
in December..."

March 1 - Bloomberg (Robin Wigglesworth): "Norway's jobless rate fell to 2.2%
in February, increasing concern that a labor shortage may push wages up further
and put pressure on the central bank to quicken its pace of rate increases."

February 26 - Bloomberg (Maria Levitov): "Russia's mergers and acquisitions
climbed 57 percent in volume last year, spurred by the positive macroeconomic
climate, said KPMG Ltd. The volume of M&A deals grew to $63.6 billion from
$40.5 billion in 2005..."

March 1 - Bloomberg (Mark Bentley): "Turkish exports climbed 25% in February
from the same period last year, according to...the Turkish Exporters' Assembly."

March 2 - Bloomberg (Steve Bryant): "Turkish inflation accelerated in February
for the second straight month... Annual inflation in February quickened to
10.2%..."

February 27 - Bloomberg (Nasreen Seria and Lukanyo Mnyanda): "South Africa's
economy expanded an annualized 5.6 percent in the fourth quarter, the fastest
pace in more than two years, as investment surged and a weaker rand helped
spur manufacturing and mining."

Latin American Boom Watch:

March 1 - Bloomberg (Adriana Arai): "Mexican bank lending to private companies
and individuals fell 0.5 percent in January, the first monthly drop in three
years."

February 28 - Bloomberg (Fabio Alves): "Brazil's economy expanded at the slowest
pace in South America last year as the government failed to spur investment
in machinery, factories and infrastructure projects. Growth quickened to 2.9%
from 2.3% in 2005..."

March 1 - Bloomberg (Eliana Raszewski): "Argentina's economy will keep growing
at a 'high rate' this year, President Nestor Kirchner [said]... 'Argentina's
economy is heading to its fifth straight year of economic growth at a strong
annual pace of about 8 percent and 9 percent, without showing signs of a slowdown,'
said Kirchner."

February 26 - Bloomberg (Eliana Raszewski): "Argentina's supermarket sales
by volume rose 16.5 percent in January from a year earlier, the National Statistics
Institute said."

March 1 - Bloomberg (Alex Kennedy): "Venezuela's annual inflation rate rose
to its highest since 2004 in February as shortages of food, construction materials
and medicines pushed up prices. Consumer prices increased 20.4 percent in the
12 months through February..."

February 28 - Bloomberg (Alex Emery): "Peru's economy expanded for a 32nd
straight quarter...on a surge in construction, manufacturing and silver output.
Gross domestic product in the fourth quarter rose 8%, compared with 7.6% growth
in the same period a year earlier..."

Central Banker Watch:

February 26 - Bloomberg (Aaron Pan and Stanley White): "Central banks are
increasingly diversifying their reserves, including cutting holdings of dollars,
according to a survey sponsored by Royal Bank of Scotland Group Plc, the U.K.'s
second-largest bank. Italy, Russia, Sweden and Switzerland have made 'major
adjustments' in foreign-exchange holdings favoring the euro and the pound,
according to the poll conducted by Central Banking Publications Ltd... China
also plans to manage its reserves more actively, the report said."

Bubble Economy Watch:

The ISM Manufacturing index jumped 3 points during February to 52.3, the strongest
reading since September. Prices Paid surged 6 points to a 5-month high 59.
Production and New Orders both jumped almost 5 points to 54.1 and 54.9, respectively.

January Personal Income was up a much stronger-than-expected 1.0%, the strongest
rise in a year. Personal Spending was up a stronger-than-expected 0.5%, down
slightly from December's robust 0.7% gain. Construction Spending was down 0.8%
from December and down 1.2% from January 2006. And while Residential Construction
Spending was 12.7% below the year earlier level, Nonresidential was up 13.5%
y-o-y.

Financial Sphere Bubble Watch:

March 2 - Dow Jones (Leslie Wines): "The cost of insurance against a default
by top investment banks Goldman Sachs Group Inc., Merrill Lynch & Co.,
Lehman Brothers Holdings Inc. and Morgan Stanley ballooned this week, amid
increased nervousness about their exposure to the shaky subprime lending market.
The trend toward more expensive credit-default swap protection for these four
banks began last week and accelerated this week, said Michael Fuhrman, an institutional
equities salesman for GFI, an inter-dealer broker for credit derivatives."

February 27 - Bloomberg (Alan Purkiss): "Money that U.S. banks have set aside
to cover bad loans is at its lowest level for 17 years at least, the Wall Street
Journal reported, citing SNL Financial. According to data from 518 banks...banks
had 1.09 percent of the total value of their loans set aside at the end of
last year, down from 1.14 percent in 2005, 1.63 percent in 1992 and 1.48 percent
in 1990."

February 26 - Bloomberg (Yalman Onaran): "Lehman Brothers Holdings Inc., the
fourth-largest U.S. securities firm, gave Chief Executive Officer Richard Fuld
a 17 percent raise to $40.5 million in 2006, a year in which Lehman posted
a record annual profit."

Mortgage Finance Bubble Watch:

February 28 - New York Times (Vikas Bajaj): "The easy money is making a quick
exit out of risky mortgages. During the housing boom that ended in 2005, money
was poured with abandon into exotic home loans that let people buy homes with
little down or without verifying their incomes. Now, lenders, financiers and
buyers of mortgages are pulling back. In a sign of that wariness, Freddie Mac,
one of the largest buyers of mortgages, said yesterday that it would tighten
lending standards and stop buying certain kinds of risky home loans made to
borrowers with weak, or subprime, credit records. The move comes as default
rates are rising, smaller lenders are starting to fail and investors are shunning
bonds backed by mortgages. The pullback will be most severely felt by minority
and poor home buyers and owners, who will face trouble in refinancing adjustable
rate loans that they can no longer afford. Those looking to buy homes with
a small down payment or none could also be forced to pay higher interest rates
and may not be able simply to declare their income without providing documentation
like tax returns and paycheck stubs. 'Lenders and originators are being significantly
penalized for the loose standards that we saw last year,' said Brian J. Carlin,
head of fixed-income trading at JPMorgan Private Bank. 'And they are going
to take that out on current borrowers.'"

March 2 - The Wall Street Journal (James R. Hagerty): "Countrywide Financial
Corp., the largest U.S. home mortgage lender, reported sharp increases in late
payments, including loans by borrowers with relatively strong credit records.
In a SEC filing, the... lender said payments were at least 30 days late at
the end of 2006 on 2.9% of prime home-equity loans serviced by the company,
up from 1.6% a year earlier and 0.8% at the end of 2004. Countrywide said payments
were late on 19% of subprime mortgage loans, up from 15.2% at the end of 2005
and 11.3% at the end of 2004."

Real Estate Bubbles Watch:

March 1 - Bloomberg (Kathleen M. Howley and Brian Louis): "The U.S. real estate
boom has gone West and Northwest. The state with the fastest growing home prices
in the fourth quarter was Utah, at 18%, more than double the U.S. average...
Wyoming was No. 2 at 14.3% and Idaho was third at 14%. Washington gained 13.7%,
and Oregon was fifth at 13.5%. Nationally, the real estate market stagnated,
with a gain of 5.87% from a year earlier, the slowest pace since 1999, the
Office of Federal Housing Enterprise Oversight said..."

Climate Watch:

February 27 - Associated Press: "More than 1,300 tons of farm-raised fish
have suffocated to death in southern Colombia, where a four-month drought caused
by El Nino has drained a reservoir to dangerously low levels... Since then
authorities have counted more than 1,200 metric tons of fish -- an estimated
3 million in all -- that have died from scorchingly high temperatures that
have lowered oxygen-rich reservoir levels by 15 feet in recent months."

Speculator Watch:

March 2 - Bloomberg (David Glovin): "David Becker, a former Citigroup Inc.
commodities trading head who pleaded guilty to fraud, told prosecutors last
year about alleged 'widespread' wrongdoing at his and rival banks in a bid
to win leniency, his lawyer said. Becker, 40, admitted in September that he
conspired to inflate trading profits by $20 million at the Citibank unit of
Citigroup...in hopes of winning a bigger bonus... 'Becker related information
about widespread practices at the commodities trading desks at large investment
banks,' including Morgan Stanley, Goldman Sachs Group Inc., Societe Generale,
Deutsche Bank AG and UBS AG, defense lawyer Ira Sorkin wrote in court papers
filed Feb. 23 seeking a reduced sentence. The banks allegedly sought 'to overstate
the value of commodities transactions and portfolios,' the lawyer wrote."

The Confluence:

What a difference a week makes. Not many trading sessions ago global equity
markets were generally near record highs and Credit spreads rested at record
tightness. Global risk markets are now on much less sure footing.

Of course, faltering markets evoke pronouncements of "economic fundamentals
remain sound" that, for me, always recall the history of the 1929 experience.
Certainly, economic and asset market booms will engender faith in policies,
policymakers and markets, not to mention a strain of fanaticism from the bullish
camp. Persevering through a few bouts of financial tumult (and bearish prognostication)
only forges a more emboldened bullish contingent.

"The high-tech, productivity-driven U.S. economy is more durable and flexible
than its liberal-left critics will ever admit. It is a private-sector free-enterprise
economy, not a government-planned one. Innovation is strong and entrepreneurial
spirits are high. The four prosperity killers, a paradigm coined by Arthur
Laffer many years ago, all look dormant: inflation, taxes and regulatory
burdens are low, while free trade keeps expanding."

Yet there's a fundamental problem with the Kudlow, Art Laffer and bullish
consensus view of the U.S. economic miracle: Finance is today hopelessly unsound.
And the reality of this predicament is that if you lose your bearings and get
your finance terribly wrong, well, other things (so-called "fundamentals")
end up not really mattering all that much. In general, a lot of decent economic
policymaking can be more than negated by financial system mismanagement. More
likely, Credit system misdeeds and resulting pricing distortions will elicit
policy decisions which only exacerbate financial excess and Bubble tendencies.
Credit Bubbles (and attendant asset inflation) tend to turn conventional analysis
on its head, with "good" policies deemed those that work to prolong the fateful
boom. Self-reinforcing asset Bubbles and policymaker complicity are virtually
guaranteed - and pose a great systemic dilemma.

When it comes to so-called "prosperity killers," a prolonged bout of rampant
Credit and speculative excess has no equal. Moreover, a decent case can be
made that, for example, cutting taxes and reducing regulator burdens during
a burgeoning Credit Bubble will only exacerbate excess and resulting economic
maladjustment. Promote "pro-growth" programs in the midst of terminal "blow-off" excesses
and you're hankering for a real mess. And, as we appreciate, confusing moderate
consumer price inflation for astute policymaking and stable finance is a hallmark
of the disasters back in the late-twenties in the U.S. and late-eighties in
Japan. These are not a political views, but analyses of Credit, inflation,
and speculation dynamics.

Not surprisingly, Mr. Kudlow and others are content already to target foreign
scapegoats for our heightened financial and economic instability: "...The trigger
for Tuesday's drop undoubtedly came from China. The Chinese have sent a Shanghai
flu across the globe." He blames "higher reserve requirements for banks, tighter
interest rates, stricter implementation of a capital-gains land tax, and perhaps
some form of capital controls are all in the rumor mill. This sounds like root-canal
advice from the U.S. Treasury and the IMF, which somehow are dissatisfied with
10% growth and 2% inflation in China. France, Germany, Japan or Latin America
should have it so bad."

Today's economic policy fanatics haven't met a Bubble they haven't fallen
for. This group also seems determined to keep their heads planted firmly in
the sand, with analysis incredibly off the mark. In their (over-confident)
minds, analyst warnings of the perils of poor lending, leveraged speculation,
derivatives, Current Account Deficits and Bubbles have already been proven
inept. All the same, the Chinese stock market was certainly not the "trigger" for
heightened global market tumult. Instead, look directly to the realm of (U.S.
gone global) "contemporary finance" - risky lending; imprudent risk intermediation,
packaging and disbursement; rampant leveraged speculation; and sophisticated
derivative trading strategies. The consequences of massive liquidity excess,
global performance-chasing financial flows, trend exacerbating hedging-related
trading, and unavoidable (Ponzi Finance) instability will inevitably come home
to roost. It started this week.

Those believing that they are examining sound economic "fundamentals" should
ponder the possibility that they are actually observing distorted signals (i.e.
robust earnings growth, abundant liquidity, low Treasury yields, narrow Credit
spreads, booming tax receipts, easily financed twin deficits, etc.) from a
system embarked on an unsustainable financial path. At some point, financial
crisis will force through a wrenching adjustment period. One can expect this
process to be instigated and shaped by a radical change in the global liquidity
backdrop and the flow of finance.

This week saw a tenuous backdrop lurch (as we've witnessed previously) into
a significant event for highly correlated global risk markets. I'll make a
few observations: First, we've clearly reached the point where global Bubble
excesses are so egregious and prevailing that overextended markets have basically
lost their capacity for pullbacks that don't incite fears of attempted mass
exits and dislocations. Second, the principal contagion mechanisms are the
hedge funds, "brokerage" proprietary trading desks, rampant capricious speculative
flows, and ballooning global derivatives markets. Third, and significantly,
The Confluence of several key developments quickly pushed the risk markets
to a state of heightened tumult.

The breakneck meltdown of the subprime originators; Freddie Mac and others
scurrying to exit the business; and the great uncertainty associated with tightened
mortgage Credit conditions comprised a major Credit market development. The
hasty rally in the yen was a second major market occurrence with negative ramifications
for global leveraged speculation. At the same time, Treasury prices spiked
higher on safe haven buying, the reversal of spread trades, and interest-rate
hedging-related buying (unwind of previous hedges as well as MBS-related hedging).
Top this off with a synchronized drop in global equities prices and selling
in metals and other commodities, and you have a series of market gyrations
that epitomizes the nightmare scenario for the leveraged speculating community.

Weaker U.S. economic data - and the prospect for worse - exacerbated the rally
in Treasury bonds. Importantly, with a large percentage of U.S. government
debt "locked up" with foreign central banks, pension funds, and insurance
companies - and a huge short position associated with (borrow cheap lend dear)
spread trades and interest-rate hedges - the Treasury market some time back
evolved into a highly unstable short-squeeze tinderbox. For the leveraged players,
the spark came from an especially dangerous Confluence of subprime mortgage
problems begetting self-reinforcing mortgage Credit tightening - of yen strength
inciting the self-reinforcing unraveling of yen "carry trade" speculations
- and of safe haven and self-reinforcing derivative-related buying and spread
trade unwinding in the Treasury market - altogether immediately emerging as
a potentially highly destabilizing Confluence of market developments.

So, in short order, global risk markets were hit with self-reinforcing mortgage
Credit, yen "carry trade," and Treasury "melt-up". Almost across the board,
Credit spreads and risk premiums widened significantly. Credit derivative indices
mounted a snappy "V" reversal from record low prices. And not unexpectedly
(considering the nature of global speculative financial flows), fears of a
reversal in speculations, aggressive derivative-related trading, and de-leveraging
quickly mounted. Global markets relishing in the perception of endless liquidity
were abruptly walloped with the specter of a liquidity crisis. Chinese policymakers
and equities had little to do with these dynamics.

I won't venture a guess as to how quickly things will unravel from here. And
not having a clue as to the actual size of the yen carry trade, or the true
scope of leveraged speculation, or the underlying nature and dynamic-hedging
characteristics of a couple hundred Trillion of global derivatives, I'm not
going to tonight profess any great insight as to how close we moved this week
toward the proverbial breaking point. I've always thought the scenario of spiking
interest rates, a plummeting dollar, and spreads widening to be more conducive
to immediate systemic dislocation. But, then, there was LTCM...

While this week certainly brought the potential for a systemic Credit and
liquidity crunch closer to reality, I'm not yet ready to dismiss the likelihood
that a significant decline in market yields will prove stimulating to some
sectors - perhaps the key corporate debt and prime mortgage arenas. New homes
sales may be horrendous, but there are indications that existing sales are
showing signs of life - but only for as long as mortgage Credit is readily
available for the vast majority of buyers. Interestingly, "prime" MBS spreads
to Treasuries widened right along with most risk premiums this week. The MBS/ABS
markets and the corporate Credit default swap marketplace must be monitored
closely for indications of general liquidity tightness.

For now, I'll continue to assume an especially unbalanced and, at times, chaotic
flow of finance throughout our highly unbalanced Bubble economy. Interestingly,
energy prices for the most part held their own this week and emerging debt
markets showed little fear of waning liquidity. At this point, liquidity issues
appear a greater concern within the Financial Sphere than they do for the Economic
Sphere. Of course this is a very fluid situation and circumstances could deteriorate
rapidly. To what extent unfolding tightened conditions in subprime and, perhaps,
certain other segments of the Credit system interplay with looser Financial
Conditions associated with declining market yields for much of the investment
grade marketplace is a fundamental analytical issue.